Debating Energy Diversification in El Salvador

El Salvador, much like its neighbors across Central America, has sought for years to find a solution to its energy woes, and more importantly, deal with the impact of its dependency on imported oil products for its energy matrix. The status quo has long been unsustainable in terms of economic competitiveness and boosting investment.

On November 13, the Institute of the Americas convened a one-day policy roundtable in San Salvador to assess the outlook for El Salvador’s energy sector as well as share insights and ideas on how to foster diversification and, most importantly, increase competitiveness for the energy sector and the nation’s economy.

Understanding the challenges facing the energy sector, the Salvadoran government created the national energy commission (CNE) to develop an energy policy strategy and vision for the country.

The CNE is tasked with creating a short, medium and long-term expansion plan for the country’s energy sector. Indeed, CNE’s diagnosis of the sector performed in 2012 foresaw supply challenges and pricing issues in 2017 for the country’s electric sector. In an effort to confront the challenges highlighted in the analysis, power bidding was developed based largely upon the policy directive of diversifying the country’s energy matrix.

At the heart of the diversification strategy lies a concerted effort to boost renewable energy deployment and incorporate natural gas into the country’s energy matrix. Concrete steps have been taken over the last year on both fronts.

Bidding was launched in July 2014 to attract 100MW of renewable electricity supply for delivery in 2016 for a twenty year period. There were 32 offers and contracts have been signed totaling 94MW of photovoltaic power generation.

But it is the effort to land natural gas in El Salvador that has received the greatest attention. Indeed, during his opening remarks, CNE Executive Secretary, Luis Reyes underscored that the broader effort to create a natural gas market in Central America has the backing of both the US government and the Inter-American Development Bank.

Central America’s leaders met with President Obama in Costa Rica in April 2013 and again in Washington DC in June 2013, with an agreement signed to analyze options for the commercialization and transport of natural gas to the region.

With this backdrop in mind, the government of El Salvador, together with electric distribution companies, organized a public bidding process in 2013 for electricity supply aimed at bringing on line 355 MW of new power generation. The bidding sought a twenty year supply of electricity and prohibited oil-derived fuel sources for generation. Two bids were received; one a coal-fired project and the other a natural gas power solution.

In late 2103, the contract was awarded to Energía del Pacífico on the basis of their proposal to build an approximately 380MW installed capacity natural gas-fired power station and LNG receiving terminal at the Port of Acajutla. Power supplies are slated for delivery beginning in January 2018.

As the project continues on the path to development, questions remain. Most relevant are with regards to the source of the project’s natural gas and the financing and credit needed for what could turn out to be the largest infrastructure project in El Salvador’s history. On both, the project developers point to important agreements with international financial institutions such as the International Finance Corporation (IFC) of the World Bank Group, and promise details soon on their agreement for natural gas supplies with a “major international LNG player.”

During discussions at the Roundtable, the postponement of a similar project in Panama was cited by many as reasons to question the potential for natural gas in El Salvador and to ask the government what the Plan B is for such a large percentage of power supplies – 32% according to CNE estimates – beginning in 2018. Government officials were quick to underscore the significant advances of the project and assured their complete support for avoiding what many called a dissimilar example from Panama.

With the topic of natural gas dominating much of the energy analysis, it bears mention that El Salvador’s participation in the continued development of the regional electric market in Central America on the back of the SIEPAC transmission infrastructure will also increasingly evolve as firm transmission right contracts and terms are developed by regional authorities.

In the short term, El Salvador will export more power into the regional system than it imports but the regional system will be a key part of El Salvador’s more long-term energy outlook.

Continuing with the last day of our #LJC2020 to discuss #gas and #power update -pipelines, #power markets and #renewables moderated by @MontseRamiroX @vozexpertamx with @memo_z @LeoBeltranR, Juancho Eekhout @IEnova_MX and Gerardo Serrato from Hartree Partners #LJC2020